It was J.P. Morgan ca. 1900 who said that the most important asset an investment banker could have was "character." It was J.P. Morgan ca. 1900 who wanted to make sure that every single one of his counterparties thought that they had been treated fairly and profited fairly from their dealings with the firm. Of course if you got into J.P Morgan's way--well, he would ruin you and take your business away from you, as he did with George Westinghouse and with the Tennessee Coal, Iron and Railroad Company which had tried to stay out of Morgan's U.S. Steel monopoly, and which Morgan picked up for a song during the Panic of 1907. But the attitude that Morgan tried to cultivate was one in which people could say, as New York, New Haven, and Hartford Railroad President Charles S. Mellen did, that "I wear the Morgan collar, and I am proud of it."

When you hired Goldman Sachs, on the other hand, you were never hiring them for their "character"--for their commitment that you would be treated fairly and get your fair share of surplus out of the deal. From the 1920s on, you were hiring Goldman Sachs for their intelligence, their sophistication, and the depth of their market knowledge--and if you wound up holding the shares of the Goldman Sachs Trading Company or the Shenandoah Corporation or Blue Ridge that Goldman Sachs had sold you in 1929, or the Penn Central Railroad bonds that Goldman sachs had sold you in 1970, well, don't come crying to them.

Felix Salmon thus, I think, mistakes the business of Goldman Sachs. The old House of Morgan was an investment bank interested in building long-term relationships. Goldman Sachs is instead about doing deals and having the knowledge, sophistication, and intelligence so that it can do the deals with greater ease than anybody else--but it won't protect you from itself, and won't protect you from yourself.

Felix:

With SEC charges, Goldman Sachs's reputation is tarnished: On May 4, 1999, Henry Paulson rang the opening bell at the New York Stock Exchange, and Goldman Sachs became a public company for the first time in its 130-year history. Paulson, chief executive and chairman of the board, was suddenly worth more than $260 million. But going public wasn't just about giving Goldman's partners 50 percent ownership of a very valuable public company. It was also about removing from them the unlimited liability for which they had been on the hook up until that point, in the event that Goldman ever lost money.... Goldman Sachs is now worth $83 billion, $50 billion more than 11 years ago. By this yardstick -- the only one Wall Street seems to care about -- Paulson's decision to go public was a great success. But now, with the firm under attack from the Securities and Exchange Commission, which has accused it of fraudulently misleading investors in a 2007 deal, it is finally clear how far Goldman truly has fallen since 1999.... Goldman Sachs is no better than the rest of Wall Street. Bear Stearns, the scrappy bank that had always seemed to be Goldman's polar opposite, actually turned down the deal that the SEC is focusing on, saying it just wasn't right. The complaint paints a picture of sleazy, untrustworthy bankers -- and it's that picture, more than the legal charges themselves, that has toppled Goldman from its pedestal....

Lloyd Blankfein, who took home a record $68 million paycheck in 2007. That's not the kind of money that can be made by giving valuable and impartial advice to clients with whom you have a long and storied relationship. Instead, it's the kind of money that comes from leverage and aggression and trillions of dollars' worth of simple and complex trades in hundreds of markets and dozens of countries around the world. Blankfein is by no means the first trader to run Goldman Sachs.... When Blankfein took over Goldman, he married a born trader's natural pugnacity to the firm's venerable name....

Without its clients' trust, the Goldman franchise crumbles, and the bank becomes just an ordinary trading shop. No longer can it charge a premium for its mergers and acquisitions advisory services, or its stock and bond underwriting, or its customized structured products. To put it in baseball terms, it has lost what another storied franchise, the Yankees, so closely guards -- its mystique and aura. The seeds of all this were sewn on that fateful day in 1999 when Goldman changed from a tight-knit partnership to a public company with quarterly earnings reports and a new appetite for record profits and growth.... A partnership would never, could never, have $1 trillion in assets. The risk is too great.... But when Goldman went public, that changed. The senior executives were now at risk only to the extent that they were also shareholders. What's more, by growing so enormous, Goldman became "too big to fail" and could therefore take on massive risk, safe in the knowledge that if things went spectacularly wrong, the government would step in. And that's exactly what Goldman did. The traditional investment bankers, and anybody else who earned income off client fees, became marginalized; the traders, who leveraged the bank's own funds as aggressively as they could and who made multibillion-dollar bets with other people's money, ended up running the shop....

[S]o far, Goldman's desperate response has only made matters worse. It tried to paint a veteran saleswoman as someone who couldn't understand simple e-mails about corporate structure. It used the word "sophisticated" 18 times in a single document, trying to shift the blame onto the victims of its scheme, because, well, they were sophisticated. And when its general counsel came onto its quarterly earnings call last Tuesday, he refused to answer most questions.... Goldman's clients have known for years that the long-term-greedy investment bankers of the past were being marginalized by the short-term-greedy traders who have taken over the company's upper echelons. But the company's mystique overwhelmed this knowledge...

Remember: back when Goldman Sachs was a partnership it blew its clients up twice--first with GSTC and then with the Penn Central--and both times nearly blew up the whole firm itself. I think the shift from partnership to publicly-held corporation as having a big negative moral hazard effect on other Wall Street investment banks. But I don't think it mattered that much for Goldman Sachs...

Comments

It was J.P. Morgan ca. 1900 who said that the most important asset an investment banker could have was "character." It was J.P. Morgan ca. 1900 who wanted to make sure that every single one of his counterparties thought that they had been treated fairly and profited fairly from their dealings with the firm. Of course if you got into J.P Morgan's way--well, he would ruin you and take your business away from you, as he did with George Westinghouse and with the Tennessee Coal, Iron and Railroad Company which had tried to stay out of Morgan's U.S. Steel monopoly, and which Morgan picked up for a song during the Panic of 1907. But the attitude that Morgan tried to cultivate was one in which people could say, as New York, New Haven, and Hartford Railroad President Charles S. Mellen did, that "I wear the Morgan collar, and I am proud of it."

When you hired Goldman Sachs, on the other hand, you were never hiring them for their "character"--for their commitment that you would be treated fairly and get your fair share of surplus out of the deal. From the 1920s on, you were hiring Goldman Sachs for their intelligence, their sophistication, and the depth of their market knowledge--and if you wound up holding the shares of the Goldman Sachs Trading Company or the Shenandoah Corporation or Blue Ridge that Goldman Sachs had sold you in 1929, or the Penn Central Railroad bonds that Goldman sachs had sold you in 1970, well, don't come crying to them.

Felix Salmon thus, I think, mistakes the business of Goldman Sachs. The old House of Morgan was an investment bank interested in building long-term relationships. Goldman Sachs is instead about doing deals and having the knowledge, sophistication, and intelligence so that it can do the deals with greater ease than anybody else--but it won't protect you from itself, and won't protect you from yourself.

Felix:

With SEC charges, Goldman Sachs's reputation is tarnished: On May 4, 1999, Henry Paulson rang the opening bell at the New York Stock Exchange, and Goldman Sachs became a public company for the first time in its 130-year history. Paulson, chief executive and chairman of the board, was suddenly worth more than $260 million. But going public wasn't just about giving Goldman's partners 50 percent ownership of a very valuable public company. It was also about removing from them the unlimited liability for which they had been on the hook up until that point, in the event that Goldman ever lost money.... Goldman Sachs is now worth $83 billion, $50 billion more than 11 years ago. By this yardstick -- the only one Wall Street seems to care about -- Paulson's decision to go public was a great success. But now, with the firm under attack from the Securities and Exchange Commission, which has accused it of fraudulently misleading investors in a 2007 deal, it is finally clear how far Goldman truly has fallen since 1999.... Goldman Sachs is no better than the rest of Wall Street. Bear Stearns, the scrappy bank that had always seemed to be Goldman's polar opposite, actually turned down the deal that the SEC is focusing on, saying it just wasn't right. The complaint paints a picture of sleazy, untrustworthy bankers -- and it's that picture, more than the legal charges themselves, that has toppled Goldman from its pedestal....

Lloyd Blankfein, who took home a record $68 million paycheck in 2007. That's not the kind of money that can be made by giving valuable and impartial advice to clients with whom you have a long and storied relationship. Instead, it's the kind of money that comes from leverage and aggression and trillions of dollars' worth of simple and complex trades in hundreds of markets and dozens of countries around the world. Blankfein is by no means the first trader to run Goldman Sachs.... When Blankfein took over Goldman, he married a born trader's natural pugnacity to the firm's venerable name....

Without its clients' trust, the Goldman franchise crumbles, and the bank becomes just an ordinary trading shop. No longer can it charge a premium for its mergers and acquisitions advisory services, or its stock and bond underwriting, or its customized structured products. To put it in baseball terms, it has lost what another storied franchise, the Yankees, so closely guards -- its mystique and aura. The seeds of all this were sewn on that fateful day in 1999 when Goldman changed from a tight-knit partnership to a public company with quarterly earnings reports and a new appetite for record profits and growth.... A partnership would never, could never, have $1 trillion in assets. The risk is too great.... But when Goldman went public, that changed. The senior executives were now at risk only to the extent that they were also shareholders. What's more, by growing so enormous, Goldman became "too big to fail" and could therefore take on massive risk, safe in the knowledge that if things went spectacularly wrong, the government would step in. And that's exactly what Goldman did. The traditional investment bankers, and anybody else who earned income off client fees, became marginalized; the traders, who leveraged the bank's own funds as aggressively as they could and who made multibillion-dollar bets with other people's money, ended up running the shop....

[S]o far, Goldman's desperate response has only made matters worse. It tried to paint a veteran saleswoman as someone who couldn't understand simple e-mails about corporate structure. It used the word "sophisticated" 18 times in a single document, trying to shift the blame onto the victims of its scheme, because, well, they were sophisticated. And when its general counsel came onto its quarterly earnings call last Tuesday, he refused to answer most questions.... Goldman's clients have known for years that the long-term-greedy investment bankers of the past were being marginalized by the short-term-greedy traders who have taken over the company's upper echelons. But the company's mystique overwhelmed this knowledge...

Remember: back when Goldman Sachs was a partnership it blew its clients up twice--first with GSTC and then with the Penn Central--and both times nearly blew up the whole firm itself. I think the shift from partnership to publicly-held corporation as having a big negative moral hazard effect on other Wall Street investment banks. But I don't think it mattered that much for Goldman Sachs...